The theatrical window: unchartered waters? Hasan Bakhshi1, March 2007 Summary • The window between a film’s release at the cinema and on DVD/video rental fell on average by one–third from 190 to 125 days between May 1999 and April 2006. • There is robust evidence that the growing importance of the DVD market over time is an important factor in explaining the trend toward shorter windows. • At any one time, theatrical windows are bunched closely around the median despite the great difference in box office performance and DVD/video potential across films. This suggests that the window–setting process may be characterised by tacit co–ordination in the industry. • The abolition of the DVD/video rental–retail window from 2003 led to turbulence in distributors’ release strategies, but there were tentative signs of re–convergence in 2005 and 2006. • There is no statistically significant relationship between box office returns and window length, suggesting that box office revenues have not been ‘cannibalised’ by DVD/video transactions – at least to date. • There is – perhaps surprisingly – little statistical evidence of differences in window strategies between the major and independent distributors. • Windows fell in 2004–2006 by more than can be explained by the set of factors considered in this report. Further research is needed to identify the source of the weakness: concerns about DVD piracy, and the threat of new digital leisure technologies are two prime candidates. 1 Introduction As in other media sectors, distribution companies in the film industry release their products through a multitude of channels. Historically, distribution has followed a clear sequence: films have first been released on cinemas, followed by DVD/video, pay–per–view, subscription channels, cable and satellite television and finally free–to–air broadcasting. New digital technologies, such as video–on–demand and internet downloads are presenting distributors with further options. The globalisation of the film industry has made the international dimension of distribution strategies increasingly important: distributors must also decide how to sequence theatrical and DVD/video release across countries. In this paper, we use a new data set of films released at UK cinemas between May 1999 and April 2006 – put together by the Research and Statistics Unit in the UK Film Council – to model trends in the window between theatrical and DVD/video release. Our goal is to inform industry discussions on release strategy. We show that the window between a film’s release at the cinema and on DVD/video rental fell on average by one–third from 190 to 125 days over this period. The window between cinema and DVD/video retail fell by even more, reflecting the abolition by distributors of the rental–retail window in 2002 and 2003. We use Screen Digest data to note that 1 Hasan Bakhshi MPhil (Econ) is an independent economist who was formerly an Executive Director at Lehman Brothers, a manager at the Bank of England and Deputy Chief Economist at the Foreign and Commonwealth Office. 1 the shortening window is a feature in other European markets, and to a lesser extent in the US too. We review previous attempts in the academic literature to explain the behaviour of the theatrical window. We split the literature into two vintages. In the earliest studies, the window reflects the trade–off that distributors face between so–called ‘cannibalisation’ and ‘marketing’ effects. Distributors prefer longer windows to the extent that they protect box office revenues (cannibalisation effect), but shorter windows in so far as this lets them capitalise on DVD sales while a film remains fresh in the minds of the public (marketing effects) (Frank (1994), Lehmann and Weinberg (2000)). The more lucrative the DVD/video market (relative to returns from cinema exhibition), the more the strategy will be skewed to milking revenues from that source. Exhibitors of course care only about the cannibalisation effect so, other things being equal, prefer longer windows. More recent research stresses the impact that release distribution strategies have on movie– goers’ expectations (Waterman and Lee (2002), Prasad, Bronnenberg and Mahajan (2004) and Waterman (2005)). These studies predict that distributors have incentives to coordinate their release strategies around long windows: that way, movie–goers – basing their expectations of future DVD release dates on the historical average – have strong incentives to go to the cinema. In this paper, we pool the films in our data set, and estimate an econometric model for the theatrical window based on the study by Waterman and Lee (2002). We conclude by suggesting further areas for research. 2 The data set Using box office data from Nielsen EDI we first identified films released in the UK and Republic of Ireland between May 1999 and April 2006 and which took a box office in excess of £0.5 million.2 We also recorded the genre, name of distributor and theatrical release date for each film. This resulted in a sample of 1406 films. We then matched the films with DVD and video rental dates wherever these were available from the research consultancy MRIB, which allowed us to calculate the theatrical–DVD/video rental window3 for each of these films. Following other studies eg Waterman and Lee (2002), we excluded the small number of movies for which the theatrical window exceeded 365 days on the grounds that idiosyncratic factors are likely to have been important in setting these windows. To complete the data set, we used Nielsen EDI sources to extract the widest point of release for each film – that is, the largest number of sites on which the film was showing during its release (for over 90% of films in our sample this was in the opening week). This procedure resulted in a data set of 806 films which we use in our econometric analysis. Together these films accounted for the bulk of the overall UK box office over our seven year 2 Nielsen EDI publishes these data at the ‘distribution territory’ level, which means that the UK and Republic of Ireland cannot easily be separated out. 3 Throughout this paper, unless stated otherwise, the theatrical window refers to the gap between cinema release and the release of the DVD/video to the rental market. From 2003 the rental window was abolished, so the cinema–to–rental and cinema–to–retail windows converged. 2 sample period. In 2005, for example, our data set captured over 95% of the combined UK/Republic of Ireland box office. Figures A1 to A4 in the Appendix show that our data set is representative across a number of dimensions: by year (but with a smaller number of films in the incomplete years 1999 and 2006); by genre (with comedy and drama most popular); by distributor (with the big 6 distributors accounting for over 80% of films in our sample), and by calendar month of release. 3 Trends in the theatrical window Figure 1 shows that the theatrical window has fallen over time in the UK, from around 190 days in May 1999 to 125 days in April 2006. The trend line shows that the rate of decline was broadly steady until late 2003, after which it appeared to have stepped up a gear. The debate on window strategies has raged on throughout this period. In a number of high–profile cases last year – such as Stephen Soderbergh’s Bubble and Michael Winterbottom’s The Road to Guantanamo – distributors released films simultaneously at the cinema, on DVD and through other channels, though these examples remain (very) few and far between. Figure 1: Average theatrical–DVD/video window, 1999 Q2 – 2006 Q1 days 200 190 180 170 160 150 140 130 120 trend 110 100 1999Q2 2000Q1 2000Q4 2001Q3 2002Q2 2003Q1 2003Q4 2004Q3 2005Q2 2006Q1 Source: Nielsen EDI and MRIB. Note: Theatrical window is defined as the number of days separating a film’s theatrical release date from its DVD or VHS rental release date (whichever of the two comes first). The ‘trend’ line denotes a polynomial trend. Figure 2 shows that the decline in the theatrical window is common across film distributors, but that there has been a good deal of turbulence in release strategies since 2003. There are tentative signs of re–convergence in late 2005 and 2006. Formal statistical measures of dispersion confirm this picture (Figure A5). 3 Figure 2: Average theatrical–DVD/video window: by distributor, 1999 Q2 – 2006 Q1 days (4-qtr ma) 220 200 180 160 140 120 100 2000Q4 2001Q2 2001Q4 2002Q2 2002Q4 2003Q2 2003Q4 2004Q2 2004Q4 2005Q2 2005Q4 UIP Warner Fox Buena Vista Entertainment Sony Source: Nielsen EDI and MRIB. Note: this chart plots the 4–quarter moving average of the theatrical window to iron out volatility in the average for a given quarter caused by the small number of films released by distributors in some quarters. The decline in theatrical window in recent years is even more marked when looking at the window between a film’s theatrical release and its appearance on DVD retail. This reflects the abolition in 2002/3 of the additional window that distributors used to set between release of films on DVD/video rental and DVD/video retail (Screen Digest (2005)). The abolition of this window meant that there was a sharp fall in the theatrical window in 2003 measured on a DVD/video retail basis compared with a rental basis. This explains why Screen Digest (2005) reports that the theatrical– DVD retail window fell by around 75 days between 2002 H1 and 2005 H1, compared with the 43 day fall in our theatrical–DVD rental data set.4 Figure 3 shows that the trend decline in the theatrical window has been an international phenomenon.